So your application for a business loan has been denied. Now what do you do? The first inclination is to use personal assets or personal credit. You are better off to resist this temptation. The better course is to figure out why the request was denied. Many times the lender will not tell you the reasons the loan was denied. Here are five metrics that may have resulted in a rejection. It is important to look at the five following factors before making any further decisions, analyze these factors and improve your situation
Cash to assets. This is a key measure of liquidity that indicates how much flexibility a firm has to deploy cash or access liquid accounts in order to make good investments. Managing your accounts receivable to ensure you’re getting paid as quickly as possible and managing inventory to avoid tying up cash are two ways to improve this metric.
EBITDA to assets. Comparing EBITDA (earnings before interest, taxes, depreciation and amortization) to a business’ assets helps show how efficient the business is. Improving this metric often involves either raising revenues (without a similar increase in expenses) or cutting costs. This is not an easy task, but better marketing or improved planning are a few ways to boost revenues. Review overhead expenses, such as telephone and equipment, or revisit vendor contracts to seek expense savings.
Debt service coverage ratio. This is measured by comparing EBITDA to a firm’s current portion of long-term debt and interest expense, so boosting EBITDA with some of the suggestions above could yield improvement in the ratio. One effective way to tackle the debt and interest side of this ratio is to cut expenses and apply the savings toward paying principal on the debt.
Liabilities to assets. This factor shows how much of your assets are financed through debt, as opposed to through profits from the business. Improving this metric is all about reducing your debt. One way to accomplish this is to make the biggest debt payment possible each month, especially for credit cards, which typically carry high interest rates that otherwise accrue interest payable, another liability account.
Net income to sales. This is a fundamental measure of how profitable your business is. Cutting operating expenses can be a short-term way to boost this ratio, but it can also backfire, so it is important to be careful. For example, skimping on equipment maintenance could lead to more expensive repairs or replacements. Longer-term goals required to improve profitability involve lowering production costs and increasing higher-profit sales.
Hopefully, when applying for a business loan you have the advice of an experienced professional. An advisor can make an assessment either before the loan application is submitted or inform you why the loan request was denied afterwards. It is better to try to improve these metrics. In this way not only will you improve your chances of getting an approval for your business loan, but you can also improve your business operations at the same time.
